Principles of Economics- Mankiw (5th) 683 - Why does a fall...

CHAPTER 31 AGGREGATE DEMAND AND AGGREGATE SUPPLY 707 aggregate-supply curve is upward sloping, we need a macroeconomic theory. Developing such a theory is our next task. QUICK QUIZ: How does the economy’s behavior in the short run differ from its behavior in the long run? ± Draw the model of aggregate demand and aggregate supply. What variables are on the two axes? THE AGGREGATE-DEMAND CURVE The aggregate-demand curve tells us the quantity of all goods and services de-manded in the economy at any given price level. As Figure 31-3 illustrates, the aggregate-demand curve is downward sloping. This means that, other things equal, a fall in the economy’s overall level of prices (from, say, P 1 to P 2 ) tends to raise the quantity of goods and services demanded (from Y 1 to Y 2 ). WHY THE AGGREGATE-DEMAND CURVE SLOPES DOWNWARD

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Unformatted text preview: Why does a fall in the price level raise the quantity of goods and services de-manded? To answer this question, it is useful to recall that GDP (which we denote as Y ) is the sum of consumption ( C ), investment ( I ), government purchases ( G ), and net exports ( NX ): Equilibrium output Quantity of Output Price Level Equilibrium price level Aggregate supply Aggregate demand Figure 31-2 A GGREGATE D EMAND AND A GGREGATE S UPPLY . Economists use the model of aggregate demand and aggregate supply to analyze economic fluctuations. On the vertical axis is the overall level of prices. On the horizontal axis is the economys total output of goods and services. Output and the price level adjust to the point at which the aggregate-supply and aggregate-demand curves intersect....
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